Effective Planning Tools for Managing Accounts

Explore the important tools and techniques in management accounting including financial statement analysis, budgetary control, decision accounting, and case studies. Learn how these tools aid in decision-making and financial planning.

Effective Planning Tools for Managing Accounts
1 | P a g e

Contents
Part A Important tool and techniques in management accounting..................................................3
Analysis of Financial Tools.........................................................................................................3
Budgetary Control........................................................................................................................4
Decision accounting.....................................................................................................................6
Part B...............................................................................................................................................8
Case 1...........................................................................................................................................8
References:....................................................................................................................................12
2 | P a g e

Part A Important tool and techniques in management accounting
There are different tools and techniques available or the management accountant. The
management accountant can use one of these tools for taking decision regarding management
accounting decision. Following are some important tools that are available for the management
accountant:
Analysis of Financial Tools
It is one of the most important management accounting tool that is available in the market.
Financial statement means the statement of profit and loss, balance sheet and cash flow statement
of the company (Chiarini & Vagnoni, 2014). These financial statements are used by the
management accountant for ration analysis, comparison of the profitability of the company with
past period. The financial analysis helps the company in following analysis:
1. Profitability: It is the ability of the company to generate profit for present and future
period of the company.
2. Solvency: It determines the capability of the company to meet its current obligation
within time.
3. Liquidity: It is the ability of the company to have current assets over and above the
current liability of the company (Chiarini & Vagnoni, 2014).
4. Stability: The term stability defines the capacity of the company to remain in the business
for the determined period. It is the capacity to bear losses that can occur in the future
year.
Example of financial statement analysis
Particular 2018 ($ Million) 2017 ($ Million) 2016 ($ Million)
Revenue 5,000 4,000 3,000
Cost of Goods Sold 3,200 3,000 2,500
3 | P a g e

Gross Profit 1,800 1,000 500
Depreciation -500 -450 -400
SB&A -300 -300 -300
Interest -50 -50 -50
Earnings Before Tax 950 200 -250
Tax -225 20 0
Net Earnings 725 180 -250
Net profit margin 14.5% 4.5% -8.33%
Now from the above table it can be ascertained the net profit percentage of company is in
growing trend and it has generated highest 14.5% net profit margin in the year 2018.
Budgetary Control
This tool of management accounting will concentrate in making plans for future business period.
The main process under this tool is to evaluate the past performance of the company and
anticipate the future inflation and growth of the company. Budget is prepared only after making
that evaluation by the management accountant. The main reason for the preparation of budget is
to prepare a standard for the employees of the company that has to be followed in order to
4 | P a g e

achieve the overall business objective of the company. There are different types of budget
prepared by the management accountant for the future years such as sales budget, revenue
budget, master budget, operational budget etc. (Soltani et al., 2014).
Now while calculating the budget past year information is added some percentage variance that
the management is expecting in the upcoming year and then create a budget. For example taking
the above given example figures of year 2018 are taken and then management has laid down the
following variance that are expected for the upcoming year (Barman et al., 2016).
Revenue increase by 20%
Expenses increase by 10%
Tax rate will be increase to 30%
Additional depreciation of 100
Particular 2018 ($ Million) Variance 2019 ($ Million)
Revenue 5,000 +20% 6,000
Cost of Goods Sold 3,200 +10% 3,520
Gross Profit 1,800 2480
Depreciation -500 +100 -600
SB&A -300 -300
Interest -50 -50
5 | P a g e

Earnings Before Tax 950 1,530
Tax -225 30% of income 459
Net Earnings 725 1,071
Net profit margin 14.5% 17.85%
Decision accounting
The decision accounting is the tool that is used in the management accounting process. Decision
making tools take care of the various decisions that are used by the management of the company
is taking overall decision of the company. The decision is regarding the operation of various
activities and buy and sell of the various assets and movement of cash flow within the company.
Following are some important decision taken under the decision making process:
1. To buy or to construct any fixed assets
2. Accepting and rejection of business activities
3. To choose the best available alternatives
4. To ascertain the price of any product of the company.
5. To calculate the opportunity cost of new projects that can be accepted by the company.
6. Proper allocation of cost to various products produced with the help of selection of proper
cost driver by the company.
Examples of decision making techniques that are used by the management accountant from
selection of different options are:
Decision matrix: This technique is used to evaluate a number of options which are available in
the decision making. Each of the option available is weighted and scored individually than all the
option is compared and the best alternative is selected (Cooper et al., 2017).
6 | P a g e

Decision tree: It is the graph that states the outcome of each probability from accepting the
project and therefore can be easily analyzed by the management accountant.
Cost benefit analysis: The cost benefit analysis mainly based on the comparison on the cost
involved in accepting the project and the amount of benefit derived from the acceptance of the
project.
SWOT analysis: it includes the analysis of Strength, Weakness, Opportunity and Threats.
Different methods of Management Accounting Report
Cost report
The cost report are prepared by the management so that the cost involved in the business
operations like production, administration, marketing etc can be ascertained. The cost report of
different years can be compared by the management of the company for evaluating the change in
cost and the reason for such change in cost. The management of the company wants to reduce the
cost to minimum so that the profit can be increased.
Budget report
Budget is an estimation statement of the future expenditure and revenue on the basis of past
results. The budgets are prepared by the company to set a goal for the different departments of
the company. The budget planned should be practically achievable. The management of the
company prepares a number of budgets for every year like sales budget, cost budget, revenue
budget, and master budget. Budget includes the inflation and projects to be accepted in the future
years. The budgets are prepared on the basis of past report (Maas et al., 2016).
Execution Report
The execution report lay down the guideline for the employees of the company in which the
execution of the plan is to make. The execution report is prepared by the top level management
of the company keeping in mind the goals which want to be achieved during the given financial
7 | P a g e

year. The execution report can be made by the company for different financial periods. Some of
the company prepares the execution plan for every month.
Job cost report
The job cost report is simply a project evaluation report prepared by the management of the
company. The job cost report is used by the management for decision making while making
selection of project from different projects. The job cost report compare the income derived from
a project and the expense incurred for that project. The most profitable project can be identified
by the management of the company and should concentrate on that project (Maas et al., 2016).
8 | P a g e

Part B
Case 1
Calculation of net present value, Profitability Index, Discounted Payback Period
Question: Cost of Capital of project is 10%
Total cash outflow of project X = 27
Total cash flow of project Y = 40
Projected cash flow
Year Cash flow of X Cash flow of Y
1 0 10
2 5 14
3 22 16
4 14 17
5 14 15
Evaluation of project X with the help of management accounting
Year Cash flow of X PV Factor @ Present Cumulated
9 | P a g e

10% Value cash flow
1 0 .91 0 O
2 5 .83 4.15 4.15
3 22 .75 16.5 20.65
4 14 .68 9.52 30.17
5 14 .62 8.68 38.85
Total 38.85
Now,
The net present value of project = present value of total cash inflow – Total cash out flow
= 38.85 - 27
= 11.85
Profitability index = net cash inflow of project / total cash out flow of the project
= 38.85 / 27
= 1.44
Discounted payback period = year before the cumulative cash flow crossed the cash outflow +
fraction of remaining year needed to reach the total cash outflow
= 3 + 0.67 year
10 | P a g e

= 3.67 year.
Evaluation of project Y with the help of management accounting
Year Cash flow of X PV Factor @
10%
Present
Value
Cumulated
cash flow
1 10 .91 9.1 9.1
2 14 .83 11.62 20.72
3 16 .75 12 32.72
4 17 .68 11.56 44.28
5 15 .62 9.3 53.58
Total 53.58
Now,
The net present value of project = present value of total cash inflow – Total cash out flow
= 53.58 - 40
= 13.58
Profitability index = net cash inflow of project / total cash out flow of the project
= 53.58 / 40
= 1.34
11 | P a g e

Discounted payback period = year before the cumulative cash flow crossed the cash outflow +
fraction of remaining year needed to reach the total cash outflow
= 3 + 0.63 year
= 3.63 year.
In the give case management accounting is used to determine the most profitable project which
should be accepted by the company. The company can depend upon any of the factor for
determining the profitability of the factor.
12 | P a g e

Bibliography
Barman, E., Hall, M. & Millo, Y., 2016. Accounting measurement tools and their impact on.
London: Econstor.
Chiarini, A. & Vagnoni, E., 2014. World-class manufacturing by Fiat. Comparison with Toyota
Production System from a Strategic Management, Management Accounting, Operations
Management and Performance Measurement dimension. International Journal of Production
Research , pp.590-606.
Cooper, D.J., Ezzamel, M. & Qu, S.Q., 2017. Popularizing a Management Accounting Idea: The
Case of the Balanced Scorecard. Wiley online library, pp.991-1025.
Maas, K., Schaltegger, S. & Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production, pp.237-48.
Soltani, , Nayebzadeh, & Moeinaddin, , 2014. The Impact Examination of the Techniques of
Management Accounting. International Journal of Academic Research in Accounting, Finance
and Management Sciences, pp.382-89.
13 | P a g e